Business and management

The euro-zone debt crisis

Is it safe?

The euro crisis feels a bit like the dentist scene from Marathon Man: plenty of fear and one, repeated question: “Is it safe?” Jean-Claude Trichet, the outgoing head of the European Central Bank, does not think the ECB should be the one to provide reassurance by continuing to buy the bonds of troubled euro-zone countries. There is no sign of his successor, Mario Draghi, changing that line. Hence growing discussion of how the European Financial Stability Facility (EFSF), the newly strengthened euro-zone bail-out pot, can leverage up to protect struggling countries like Italy and Spain.

In particular, there is lots of talk about using the EFSF as an insurer, which would guarantee the buyers of government bonds of peripheral countries against losses up to a certain amount. The idea has been around for a while but is now being given a fresh push by Allianz, a big German insurer (that just happens to own PIMCO, a huge bond-fund manager).

The idea has its attractions. It would increase the resources of the EFSF: rather than having to buy Italian bonds outright, it would only need to pledge 20% of the bond's value to achieve the same result. And it would keep private investors involved, which helps with price discovery.

But there are problems, too. Firstly, anything that sets a defined threshold for investors' losses has the potential to cause trouble as well as alleviate it. Let's assume the EFSF insures against a 20% first loss on Italy. If the country's debt profile worsens and the market price implies a greater-than-20% loss, or even starts to get close to it, then yields will presumably start to spiral up again. A partial guarantee is reassuring only if there is still something left to cover.

Secondly, if the guarantee is triggered, is it credible? Allianz reckons the guarantee could remain unfunded, but if the money will be raised only when the worst has happened—in the event of an Italian default, say—how easy would that be? It is noticeable that yields on EFSF borrowing are already rising.

One option is to prefund the guarantee: the EFSF would raise the money and lend it to needy governments; they would use the cash to buy collateral, which would be set in escrow for investors in the event of a default. The effect would be a bit like issuing covered bonds that give investors a claim on the issuer and on a separate pool of assets. But the third problem with the Allianz plan is that it proposes only to issue guarantees on new issuance rather than existing debt, leaving banks that already own the stuff exposed to the same losses as before. For bank creditors, the debt stock is what matters, not the flow of new debt.

One answer to these problems is to recapitalise the banks now to protect against a wave of sovereign defaults rather than just a haircut on Greek debt. But that seems politically implausible, as this week's issue of The Economist argues; is extremely hard to model; and would also end up eating into the very EFSF resources that the insurance plan is designed to increase.

If the ECB will not help, the insurance idea may end up being the best option available. But the root of this crisis is a fear about the risk of sovereign default. Issuing contingent guarantees does not remove that risk. “Is it safer?” is not really the question that is being asked.

Is speculating on the Euro, or indeed any currency, ever safe? Should it be safe at all.

A system that guards real long time investors in government paper against loss is of value. To protect speculators is wrong and they should suffer first losses should their efforts to undermine a basically sound currency succeed.

The problem is, that in the current market, it is impossible to determine who is who.

Is speculating on the Euro, or indeed any currency, ever safe? Should it be safe at all.

A system that guards real long time investors in government paper against loss is of value. To protect speculators is wrong and they should suffer first losses should their efforts to undermine a basically sound currency succeed.

The problem is, that in the current market, it is impossible to determine who is who.

After decades of irrational/insane profligacy, nothing is safe or guarenteed, any more, in Europe. The bubble has finally burst & the Continent is on the verge of absolute & abject collapse. Living in collosal denial will not stave off or even slow the disintegration at all. Rather it will only lead to much more havoc & shock, when the gruesome end comes, ECB/EFSF notwithstanding..

I think this is a great idea and will work very well. The main reason behind my predicted success of this plan is that it involves private investors. That is the strength of capitalism. These private investors will compete to make as much money as they can and therefore will probably be more successful than if it was just governments involved. Private investors tend to be more successful because lets face it, humans are naturally selfish and want as much money as they can get.

All of these problems, the ECB has to deal with. It is all falling on them right now. Whatever they end up doing about these problems needs to fix past problems and clear up past debt a long with making long lasting changes for the future.

Germany has repeatedly pointed out that the ECB’s role is not to bail governments out. While the central banks are supposed to be the ‘lender of last resort' history has repeatedly shown that the central bank needs to be independent of politics. On the other hand, some leaders argue that in the case of a project such as the Eurozone, the division of monetary and fiscal policy is precisely the reason of the region’s downfall.

In the end, the markets are about perception, not truth. Maybe politicians should simplay say what investors want to hear- but to what extent should the markets be allowed to influence key political decisions?

Jeez, no matter how much I read about this "crisis" I still don't get what's going on.

Lemme see if I get it: Euro countries decided to share (print) a common currency. They don't have the same national bank or sovereign debts. Yet, now the more stable countries are tasked with constantly bailing out the ones that wont or cannot balance their books. As a result all of these nations have rising levels of unsustainable debt. Did I get that right?

So, who exactly is all this debt owed to? The only thing that appears consistent is that the average tax payer has to "rescue" the profligacy of an elite idiot political class and the wealthy.

Lots of nonsense written below the line about "speculators". This would seem to be the heart of the otherwise rather easy to solve problem (rich pay for poor, like they do in any and all other currency unions), peoples heads are full of complete and total drivel.

The "problem" with the weak Euro states is that no one will lend them money at rates they can afford for the simple reason that lenders, all of them, everyone else in the whole world, do not think the weak Euro states can pay it back.

How is this "speculation"?

It clearly is not.

On the sidelines there are of course people who spot such collossal c*ck ups and widespread mental failure and bet that this will lead to crisis. This IS speculation

Its like someone shouting at you as you push your head into a meat mincing machine. A vainglorious cretin will try and stop the shouting, a person destined to pass on their genetic material will say, "thanks for the warning"

p.s. This is also true of the 2008 crisis. What happened was way back in the 1990's Bill Clinton ordered Fannie Mae and Freddie Mac to start lending to sub prime borrowers so the political good of everyone being able to own their home (even if they couldn't afford it) could be realised for the Clintons. The "bankers" then repackaged this junk to make it fundable. Once again bankers are the mechanism, not the cause.

Nassim Taleb said that Black Swan events occur when received wisdom departs too far and for too long from reality. Talk to anyone today in the pub or the street about economics and it is clear a great catastrophe is upon us. The mass media has rendered people almost totally ignorant yet at the same time made us all believe we have the unique insight that eludes other seemingly far more intelligent people than us and should be enraged at the perceived wrongs done to you by some person with more than you. Toxic stuff.

Hold on tight, watch out for foolish story tellers (you can spot them by the level of emotion - high = story, low = reality), they are everywhere, and they are the ones to fear! A good and current example is the collected statements of European leaders about the Eurozone crisis and the various "tests" that have been presented. As they have demonised bankers they face the reality that to start fixing it means giving lots of money to..... err... bankers! These Euro bankers were forced by politicians to hold sovereign debt that politicians then made default

Carry on hunting your witches of you like, but remember, there are no descendants of witch hunters living today. Time for some creative destruction in and of human minds.

Sadly all the save the Euro talk is about giving billions to Greece and then to Italy Spain and Ireland via the new EFSF and the ECB but not one word or plan to create jobs,look after those in retirement and get the economy moving to pre 2008 levels. The talk is all about saving countries and big business who are on the hook for causing the problem in the first place by loaning money on the speculation of windfall profits. Let Greece default (going to happen anyway) creditors take a haircut, working class has done more than their share already, turn the page and pick up the pieces. Nothing new here Greeks dealt with Julius Ceasar and survived the EU leaders and others (Obama & Cameron) should seem like child's play.

Speculation about the future of the Euro, as with speculation about any currency is only speculation, with the European economy anything could happen in the future. Agreed there is lots of fear in Europe about a recession, but with monetary issues you can only look so far into the future, especially since Europe is unsure whether it is "safe" to use EFSF as an insurer or try to have the ECB help. The one thing that is sure is that Europe needs to make an economic plan and follow it through.

As Lawrence Olivier discovered in Marathon Man, if you keep asking the same question "is it safe?" while applying pointed pressure to sensitive areas, you'll get the answer you want eventually... But it may not be reliable.

This issue will dramatically worsen if something is not done now, and this should have been acknowledged awhile ago to prevent this from occurring. I believe Europe's best bet is to completely end CDS. More jobs should be made for those that are in desperate need of them, that should be their top priority. Creating jobs should go before talks about who to give money.. Italy, Spain, Ireland. If European people have a steady income and job, this Euro debt crisis would not be as severe. The people should be the top priority right now, not big business and countries that are at the point of no return. It is the government's job to realize what must be done to save their nation, and make moves fast or the Euro-zone debt crisis will only continue to worsen and worsen. It will be very interesting to see what occurs in Europe regarding all of these Euro debt issues, it will either take a turn for the worse or begin to get better, only time will tell.

After decades of irrational/insane profligacy nothing is safe or viable anymore in Europe. The bubble has long burst & the Continent totters on the verge of abject & absolute economic collapse. Living in collosal & catatonic denial will not stave off or even delay the gruesome finale', any. Infact, all it will do is multiply the pain, suffering & shock profoundly, when it happens - ECB/EFSF, notwithstanding..

Yep, lets do exactly what PIMCOs bosses tell us - lets have a nice Channel to promote "price discovery", so we can leverage our CDS nicely.

The key to the end of the crisis is to end CDS ! Full stop. Abolish them.

But first, perhaps, tax everyone who deals in them. That is mainly US Banks, betting on the demise of countries in the Euro area, and their hedgefund clients.

Make the whole system completely transparent. Who is betting against whom? Then a new Financial Transaction Tax on CDS alone (30% of turnover) or other short selling scams on countries should generate enough revenue to solve the Eurocrisis.

Although the central bank should stand alone from governing bodies and politics it needs to step up as the lending hand in a time of need even though Germany has said it is not there duty to do so. Yet, maybe the reason for downfall is because the separation of fiscal policy from monetary policy in Europe. If they bring the two together with reasoning and a strong central body then maybe things will be okay? Hopefully.

If Italy's problems are as severe as I have read in your publication and elsewhere, perhaps I should sell apples on the streets of USA. "Get in on the ground floor," as they said long ago. On a worldwide "Great Depression?" Not very appealing.